Today I’m diving into a topic that’s crucial for you as a medical professional in Canada to understand: family trusts. In this blog post, I want to shed some light on the three family trust disadvantages for medical professionals – insights that could save you time, money, and a whole lot of headache down the road. But don’t worry, I’m not here to rain on anyone’s parade. Instead, I aim to equip you with the knowledge you need to navigate the complexities of setting up a family trust with confidence. So buckle up, because we’re about to uncover the truth behind these three common pitfalls and how you can steer clear of them. Ready? Let’s dive in! (And for a broader discussion and video on family trusts, please see Family trusts for medical professionals: Saving taxes.)
I’ve painted a lot of rainbows and lollipops with respect to the use of a family trust. There are three primary disadvantages I would suggest.
I’m George Dube, saving the world from tax one bow tie at a time™.
1) Cost considerations
First is the cost in setting up a family trust. Not that it’s exorbitant, but it’s certainly more than just setting up a corporation.
2) Time and complexity
Second disadvantage. It’s a bit of a pain in the rear end to set up. It takes some extra time. It’s generally at least a three-month process. And there’s certain hoops and hurdles that we need to go through, make sure it’s done properly. There’s about a half a dozen things that if we do incorrectly, it will forever taint that trust, make it useless. So we’re gonna slowly, methodically go through our checklist, make sure it’s done correctly, because I do not wanna be in a scenario 10, 20 years from now where we’re having a discussion, something to the effect of, “Gee, George, you messed up this,” and I have to reply, “But yes, but we saved two weeks time getting it ready for you.”
3) Limited lifespan
Third disadvantage is that the family trust is good for 21 years. It’s a long time from an investment in a business perspective, but a short timeframe from an intergenerational perspective. So what happens at the 21 year anniversary is that if we do nothing with the trust, all of the assets within the trust are deemed to have been sold for fair market value, in most cases, a tax disaster.
So instead, typically we will remove the shares of the company owning the investment holding company effectively to one or more of the beneficiaries of the trust. And when properly done, this can be done without paying any income tax as if that beneficiary was the original owner of the shares. Then in many cases, we’ll do something I’ll call refreeze the company, essentially, meaning we’re gonna set up a new family trust, start again. So every 20 ish years, we’re gonna go through the process again. And some people may not be thrilled with that. And again, I’m not pretending it’s perfect, but I would suggest to you that in most corporate situations, every 10, 15 years anyway there, there was going to be a change in tax rules, legal rules, family situation, investment situation, something was going to generate a required change. This just locks us into every 20 ish years. Not the end of the world, but let’s not pretend it’s perfect.
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax and accounting advisor about your specific situation.
